No sunny spots in debt data

Australian households and business remain reluctant to take on more debt, with new monthly borrowing data from the Reserve Bank of Australia sparking pessimism about where new spending and economic growth will come from.

In October, credit growth fell to just 0.1 per cent, its lowest rate in more than a year. This was despite a rate cut on October 2 that was passed on, in part, to mortgage holders by all four big banks within 10 days.

Personal credit growth was 0.1 per cent last month and business credit growth was -0.3 per cent, its second negative result in three months. Housing credit – as measured over 12 months – has fallen to 4.7 per cent, the lowest rate of growth in data since records began in 1977.

The data has left market economists reeling. “Private sector credit data tends to be a good forward-looking indicator of activity," said CommSec economist Savanth Sebastian. “Scouring through the data, there certainly weren’t any rays of sunshine." Commonwealth Bank expects rate cuts will stay on the agenda.

JPMorgan economist Tom Kennedy was disappointed with what the release said about the economy. “Business credit was the most notable underperformer . . . that said, growth in housing credit has also been disappointing, with the sector seemingly unable to gather any sustained momentum despite the cash rate approaching near record lows," he said in a note.

Weak credit growth should make more rate cuts easier, he said. “The fact that the cuts have not created froth in housing credit should temper any concerns RBA officials may have that further easing will fuel household debt and house prices."

The bad news about private credit growth comes on top of weak capital expenditure data on Thursday. That has ANZ Bank concluding the mining investment cycle is peaking at a lower level than expected.

“The overall investment outlook now looks weaker than previously thought. We continue to expect the RBA to lower the cash rate by 25bps next week and to maintain an easing bias next year," ANZ economists wrote in a note.

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The RBA will consider feeble credit growth as it decides about official interest rates in December. Markets swung sharply this week to price in a cut to official rates as a strong chance. On Friday afternoon, the chance implied by financial market pricing was 84 per cent, up from as low as 52 per cent on Monday.

National Australia Bank chief economist Rob Henderson has changed the bank’s prediction for December from no cut to cut, citing “accumulating evidence that the domestic economy is weak, as mining and energy comes off the boil and as the high dollar weighs down large swaths of the economy. Fiscal headwinds won’t help in the coming 12 months." He anticipates one more cut, in May next year.